The April 18, 2019 release of the International Trade Commission (ITC) report on the revised North American Free Trade Agreement (NAFTA) does nothing to alter the reality that the fate of NAFTA 2.0 relies largely on whether the administration engages with congressional Democrats and then with Canada and Mexico to improve the text signed last year. That Democrats, unions and others who have opposed past pacts seek improvements – rather than the deal’s demise – reveals that a path exists to build broad support. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. Indeed, all four of the trade deals Congress enacted in the past decade required changes to their texts after the pacts were signed in order to pass the House.

The official government projections of very small gains spotlight how Donald Trump has oversold the revised NAFTA, which he promised would “support many hundreds of thousands of American jobs,” “send cash and jobs pouring into the United States” and eliminate the large U.S. trade deficit with NAFTA countries. The modest findings reinforce congressional Democrats’ views that absent more improvements, the revised deal won’t stop NAFTA’s ongoing damage.

The ITC projects that after six years, the pact would add 175,800 jobs – about the number created by the economy in a slow month – and increase wages by 27/100 of one percent or an average of $2.58 per week. Almost 80 percent of projected job growth is for workers in the service sector without a college education, meaning many of these jobs are likely to be low-paid. Almost one million mainly U.S. manufacturing jobs have been lost to the original NAFTA according to Trade Adjustment Assistant certifications, which undercount trade-related job loss.

Only $1.8 billion in trade deficit reduction with NAFTA countries is projected over time, relative to a U.S. 2018 NAFTA goods deficit of $215 billion. Yet, based on past performance of ITC projections on trade pact deficits, the more likely outcome is a larger NAFTA deficit. Consider the ITC’s original assessment of NAFTA: Within 10 years, the goods trade deficit with Mexico had grown to almost 20 times the level the ITC had projected in its dimmest forecast.

Overall, the ITC projected minuscule gains from NAFTA 2.0: one-time gains of 35/100 of one percent in real GDP, 12/100 of one percent in employment and 27/100 of one percent in wages. In contrast to past reports, the agency somewhat obfuscated the time period of the projected GDP gain of $68.2 billion. It assumes a six-year implementation period, so if gains are realized steadily over that period, it means annual growth gains of only 6/100 of one percent for six years. That is smaller than a rounding error on the $19 trillion U.S. economy. The sum total effect of NAFTA 2.0 would be a GDP on January 1, 2025 that would be attained on March 6, 2025 without the deal.

Most of these economic gains are derived from a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce “policy uncertainty” by freezing in place environmental, consumer protection, financial and other safeguards. If the ITC had not done this, the report would have projected a negative outcome. All $68.2 billion of the deal’s supposed economic gains arise from simulating the impact of removing trade barriers that do not exist. In other words, the gains are generated not through the removal of trade barriers directly, but through the elimination of the possibility of new future regulatory policies, which are deemed to be potential trade barriers. Absent this fabrication, the revised NAFTA would have been projected to lower the United States’ GDP by $22.6 billion and reduce the number of jobs by 53,900. The very notion that “reducing policy uncertainty” generates economic benefits is questionable. But in this study, these imagined gains also are not balanced against foreseeable downsides, such as financial instability, lower worker productivity from injury or illness, and the like. Perversely, given the focus on “uncertainty” the ITC choose to simply not analyze the impact of one prominent new feature of the deal - its review and sunset provision - that industry attacks as creating new uncertainties to North American trade.

Absent methodological monkey business, how could a NAFTA revision that involves no major trade barrier elimination be projected to create almost 90 percent of the GDP gains as it predicted for the original NAFTA even though the first deal substantially cut tariffs? The study also projects almost 50 percent more economic gains than the Trans-Pacific Partnership (TPP), even though the revised NAFTA covers only two other countries with which the United States has had almost no tariffs and has been integrated with for 25 years under NAFTA, while the TPP included 11 nations and involved significant tariffs cuts with Japan, Malaysia and others.

ITC’s Projected Real GDP Gains (in 2017 dollars)

NAFTA

$77.9 billion

TPP

$42.7 billion

USMCA

$68.2 billion

The report then feeds these fabricated gains from the reduction of “policy uncertainty” into the same old computable general equilibrium (CGE) model that for decades has produced rosy ITC projections that have been systematically contradicted by trade pacts’ actual outcomes. The CGE model simply assumes away the very results that have often occurred under past pacts: long-term job loss, trade deficit increases and currency devaluations. By design, the CGE model assumes that the overall U.S. economy remains at full employment, that income inequality and the U.S. global trade balance does not change, and currency values are locked. These assumptions have systematically resulted in ITC trade-pact projections being entirely unrelated to actual outcomes.

IMF economists recently calculated negligible U.S. economic growth gainsfrom the revised NAFTA relying on the same economic model as the ITC, but without the additional assumptions of gains from regulatory freeze. They found the United States would experience a welfare loss of $794 million, while Canada enjoys a small gain of $734 million and Mexico a gain of $597 million. The IMF study also found a zero percent change in real (inflation-adjusted) GDP for the United States, a 0.02 percent change for Canada and a -0.01 percent change for Mexico.

The ITC’s past trade-pact projections have been so entirely wrong – in direction, not just in scale – that findings of minuscule gains from the revised NAFTA would not have obtained as much attention had Donald Trump not set such a high bar by overselling this as a new species of trade deal that would miraculously reverse NAFTA’s decades of damage.

NAFTA: U.S.-Mexico Trade

1993 - Baseline

ITC Projection

Actual

$1.6 billion goods surplus

$2.3 billion goods deficit

$83.7 billion goods deficit

China-WTO: U.S.-China Trade

1998 - Baseline

ITC Projection

Actual

$57 billion goods deficit

$60 billion goods deficit

$281 billion goods deficit

U.S.-Korea FTA: Trade

2011 - Baseline

ITC Projection

Actual

$19 billion goods deficit

$16 billion goods deficit

$22 billion goods deficit

The ITC report projects that longer periods for patents and other intellectual property monopolies will deliver economic gains by reducing what the ITC describes as “trade costs,” while dismissing any economic losses (reduction in welfare) accruing from high medicine prices. The report explicitly admits that “originator [first-to-market] firms” will gain “from stronger IPR protections” while “follow-on or generic firms” will suffer “losses.” Not only do high medicine prices hit Americans directly, but extracting licensing payments from foreign consumers by imposing these rules on NAFTA partners can crowd out purchases of U.S. exports, entailing U.S. job loss.

Interestingly, for the first time the ITC considered the impact of investor protections and the related roll back of Investor-State Dispute Settlement (ISDS), concluding: “The Commission’s quantitative analysis also shows that the reduction in the scope of ISDS would have a small positive effect on the U.S. economy. In particular, U.S. domestic manufacturing and mining output is estimated to increase due to greater amount of capital available in the United States for investing in such industries because of reduced investment in Mexico.”

The ITC just assumes labor terms will be enforced, even though lack of enforceability is a core critique: “The USMCA labor provisions are expected to promote higher wages and improved labor conditions in member markets if these provisions are enforced.” (emphasis added) After noting that significant variable, which is not ensured in the current text, the report proceeds to project a 17.2 percent increase in Mexican union wages and then to feed that finding into the broader model to project U.S. employment and other gains. There is no alternative simulation based on non-enforcement despite the upside scenario relying on a course of action that is desirable, but far from certain: Mexico passes and implements labor law reform to comply with the agreement and the pact’s labor provisions remain enforced, which leads to more independent unions, which leads to successful collective bargaining, which leads to the replacement of thousands of low-wage “protection” contracts, which ultimately leads to higher wages. Second, if that happens, the projected gain is from $1.50-$3 an hour Mexican manufacturing wages to $1.76-$3.51 an hour wages, an increase that is too small to either improve Mexican workers’ lives or counter the low-wage pull factor to outsource U.S. jobs.

The ITC projects very small job gains in the auto sector from the deal’s tighter rules of origin and other auto-sector-specific terms, while the U.S. Trade Representative’s office projects more jobs in the auto parts supply chain based on data from car producers that remains confidential.

The ITC ignores the environmental chapter of the agreement, even as the administration claims it is the strongest such chapter of any trade agreement.

The ITC concludes the revised pact will have little benefit for the energy sector, contradicting industry claims. “Given the already very low most-favored-nation (MFN) tariffs for the parties, as well as the effects of recent reforms in Mexico’s energy sector, USMCA’s energy-related provisions are likely to have little impact on U.S. trade and production of energy-related products.”

Note: The U.S. International Trade Commission (ITC) today released a study on the potential economic impact of the revised North American Free Trade Agreement (NAFTA) that projects minuscule economic gains in real GDP of $68.2 billion, or 35/100 of one percent. The highest projected gains in wages, employment and output are all less than one-half of one percent – with most figures much lower. Undergirding a large share of those tiny gains is an assumption that locking in lengthy intellectual property monopolies and freezing environmental and consumer safeguards leads to economic gains and no downsides. The report projectsthat over time, the agreement would add 175,800 jobs, which is less than one-fifth of what the U.S. government has certified as lost to the original NAFTA. Public Citizen will soon release a detailed summary of findings. [UPDATE: findings available here]

“The minuscule projected gains in this long-awaited official government assessment contradict Donald Trump’s grandiose claims that it will lead to ‘cash and jobs pouring into the U.S.’ and reinforces congressional Democrats’ views that absent more improvements, the revised deal won’t stop NAFTA’s ongoing damage.

The ITC’s past trade-pact projections have been so entirely wrong — in direction, not just in scale — that today’s findings of minuscule gains would have limited effect on the debate had Trump not set such a high bar by overselling this as a new species of trade deal that would miraculously reverse NAFTA’s decades of damage.

This report does nothing to alter the reality that the prospects for a NAFTA 2.0 vote rely largely on whether the administration engages with congressional Democrats and then with Canada and Mexico to improve the text signed last year. That congressional Democrats, unions and others who have outright opposed past pacts seek improvements rather than the deal’s demise reveals there is a path to build broad support. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. Indeed, all four of the trade deals Congress enacted in the past decade required changes to their texts after the pacts were signed in order to pass the House.”

It’s not just trade economists who are eager for the U.S. International Trade Commission’s (ITC) long-awaited analysis of the revised North American Free Trade Agreement (NAFTA). Publication of the statutorily required report usually signals that the congressional debate on a trade deal is nigh. But this ITC trade-pact report is not usual.

First, as political silly season looms this fall, whether there is a vote on NAFTA 2.0 anytime soon relies largely on whether the administration will engage with congressional Democrats and then with Canada and Mexico to resolve problems Democrats have identified with the text signed last year. That congressional Democrats, unions and others who have outright opposed past pacts seek improvements rather than the deal’s demise reveals there is a path to build broad support for it. But absent removal of new monopoly protections for pharmaceutical firms that lock in high drug prices and the addition of strengthened labor and environmental standards and enforcement, the deal is not likely to garner a majority in the U.S. House of Representatives. All of the trade deals Congress has enacted in the past decade required changes to their texts after the pacts were signed to get through the House.

Second, because the ITC has used a research methodology for decades that produces rosy projections that have been systematically contradicted by trade pacts’ actual outcomes, few people are willing to rely on the agency’s topline predictions. But the underlying assumptions in the study will be revealing, as they will reflect the agency’s sense of what is – and is not – different from the original NAFTA.

Some Key Things We Will Look for in the ITC’s Assessment on the Revised NAFTA

Are any projected economic gains meaningful? For example, the ITC projection of a 0.23 percent gain in national income from the Trans-Pacific Partnership (TPP) over 15 years meant that the United States would be as wealthy on Jan. 1, 2032, with TPP as it would be six weeks later (Feb. 15, 2032) without it. Or, the ITC projected TPP gains to gross domestic product (GDP) of $47.2 billion over 15 years. But this large figure actually was equivalent to an additional 0.01 percentage point of annual growth. And relative to the U.S. economy’s size, it is tiny.

What about the trade balance? Though the magnitude of projected change likely will be small, does it affirm or contradict the administration’s talking points about United States-Mexico-Canada Agreement (USMCA) bringing about “more balanced, reciprocal trade” and/or Donald Trump’s campaign promises to bring down the NAFTA trade deficit?

What does the ITC think is a real change that merits inclusion in its modeling:

Were the new labor and environmental provisions considered “economically important” enough to model? If so, are a range of impact estimates provided based on the degree of compliance?

Will the ITC model the impact of the major rollback of investor-state dispute settlement (ISDS), inclusion of a new Labor Annex and the Labor Value Content wage rule, stronger rules of origin and other elements of the deal that have led opponents of past pacts to work to remove non-starter terms and improve others rather than launch a campaign to kill the revised deal?

Will the ITC continue to exclude from its core model chapters like those on intellectual property, even though the impact on consumers of locking in high medicine prices through longer patent monopolies should be weighed against other consumer welfare calculations?

With tariffs largely eliminated by the original NAFTA, how much of the economic gains from the revised NAFTA arise from cutting “non-tariff barriers”? In such models, health and environmental standards are labeled as non-tariff barriers and removal of them is falsely assigned an assumed positive value, while economic and social costs of eliminating such domestic policies are ignored.

Has the ITC inappropriately conflated projected effects of the removal of Section 232 steel and aluminum tariffs with the implementation of the NAFTA 2.0 agreement?

As Public Citizen and other organizations described last year in official ITC submissions for this report, the agency has historically overestimated the gains from previous free trade agreements (FTAs). Past ITC studies have systematically projected positive outcomes that were contradicted by the actual results, and the agency is unlikely to have overhauled its entire approach for this agreement.

International Monetary Fund (IMF) economists, using the same underlying model as the ITC, recently projected the USMCA would result in a larger U.S. trade deficit with NAFTA countries, a loss in overall welfare for the United States (alongside gains in overall economic welfare for Mexico and Canada) and zero U.S. real economic growth gains. The IMF study relied on the same economic model that the ITC uses, a so-called computable general equilibrium (CGE) model with the same underlying “GTAP” database. That model assumes away the negative outcomes that often have occurred under past FTAs – job loss, trade deficit increases and currency devaluations – and explicitly fails to model portions of the text that have negative impacts. The divergence between past ITC projections and actual outcomes means the factors not included in the model must be larger than the factors that are incorporated into the analysis.

Despite these questionable assumptions, the IMF projections based on the same methodology was that the United States would experience a welfare loss of $794 million, while Canada enjoys a small gain of $734 million and Mexico a gain of $597 million. The IMF study found a zero percent change in real (inflation-adjusted) GDP for the United States, a 0.02 percent change for Canada and a -0.01 percent change for Mexico.

As was detailed in Public Citizen’s ITC submission, the agency’s record in evaluating the economic impact of trade pacts has been abysmal. Gains to trade agreements have been consistently overestimated. After the original NAFTA was implemented, for example, the goods trade deficit with Mexico grew to almost 20 times the projected level within 10 years than even the dimmest forecast provided by the ITC (see graph).

The use of the CGE model is even less reliable in the context of there being no significant tariff cuts in the USMCA. The CGE model originally was meant to focus on the impact of cutting tariffs. But NAFTA 2.0 cannot cut tariffs that already are zero.

So what could possibly be the basis for any findings of gains?

Will CGE modeling be used to find gains from the removal of so-called “non-tariff barriers,” otherwise known as food and product safety standards, service-sector regulations for financial stability and other public interest goals and more? Trying to guesstimate values for such changes introduce substantial uncertainty into the model, according to academic economists.

Will the ITC’s modeling take into consideration possible lack of compliance, given a proven record of just that with respect to past pacts’ ostensibly enforceable labor and environmental terms? The CGE model considers only an endpoint – a final outcome assuming full implementation – not whether other nations may not fully implement or enforce a pact’s terms. And, by design, the model assumes the trade balance does not change as a share of GDP and that overall employment levels remain constant – that workers who lose jobs simply obtain new jobs in other sectors where wages are presumed to increase.

Finally, if past practice holds, the ITC will not consider the effect of intellectual property rules that lock in high medicine prices. The most controversial component of the revised NAFTA’s intellectual property provisions are monopoly protections for drugs called biologics that comprise 70 percent of the skyrocketing growth in drug spending. Not only do these provisions hit American pocketbooks directly, but extracting licensing payments from foreign consumers by imposing these rules on NAFTA partners can crowd out purchases of U.S. exports, entailing U.S. job loss.

How the ITC handles these issues will be interesting to trade wonks. But the report is not likely to reveal much about either the pact’s probable effects or its prospect for congressional passage.

Note: The Trump administration will release its latest report on trade partners’ currency practices imminently. Like the administration’s previous four iterations of this report mandated by Congress to identify countries whose distortion of currency values to gain trade advantages must be addressed, it is unlikely any country will be listed. Under the current criteria, set by the Obama administration, no country is again likely to be named. Public Citizen has recommended changes to the criteria that would use the authority granted by Congress to cover more countries and include broader data and thus actually identify countries that gain trade advantages using currency practices. The Trump Treasury Department has stuck with the old Obama administration criteria.

“One of Trump’s most emphatic campaign promises was to declare China a currency manipulator on Day One and crack down on any country misaligning its currency to cheat on trade, but Trump’s Treasury secretary has chosen to rely on criteria created by the previous administration that ensure no action is taken.

The Trump Treasury Department approach reflects a business-as-usual, wink-wink-nod-nod relationship with the multinational corporate job outsourcers who instead of making goods here can import products more cheaply back into the U.S. because of misaligned currencies. This situation that has contributed to the loss of millions of U.S. manufacturing jobs.

In the context of record-setting U.S. trade deficits, the administration must take full advantage of its opportunities to discipline countries that manage their currency values in a way that affects trade. While the NAFTA 2.0 deal sets an important precedent by being the first to include a currency provision in its main text, it provides no mechanism for actually disciplining countries that manage their currency values in a way that affects trade.

The Trump administration must take full advantage of the authority Congress has provided the Treasury to influence the foreign exchange practices of any trading partner through the semi-annual reporting process.”

Background: Large U.S. structural trade deficits consistent with misaligned currencies have grown in recent years. Data released on March 6 by the U.S. Census Bureau show record-setting U.S. goods trade deficits, increasing each year since Trump came into office. The U.S. goods trade deficit with China of $419 billion in 2018 is the highest ever recorded while the U.S. goods trade deficit with the world in 2018 reached $879 billion, the highest in the decade since before the 2008-09 financial crisis.

Grim Trade Balance Data Spotlights Imperative for Trump to Not Cave on China Trade Talks and to Work with House Democrats to Improve NAFTA Deal

The 2018 annual trade data released by the U.S. Census Bureau last week show record-setting U.S. goods trade deficits of $879 billion with the world, $419 billion with China and $215 billion with NAFTA countries, capping two years of steadily rising trade deficits for the Trump administration that contrast with candidate Donald Trump’s promises to quickly reduce them. The rate of growth in the trade deficit has increased during the Trump era, with the increase from 2017 to 2018 greater than the change from 2016 to 2017. (All figures below are adjusted for inflation to a base year of 2018. Figures represent trade balances expressed in constant dollars, so, for years prior to 2018, the numbers are different than the data unadjusted for inflation that is provided by Census.)

“More important than Trump failing on the trade-deficit-reduction benchmark for success he set on trade is that he focus on addressing the root causes by securing a China trade deal that’s not about short-term soy and gas sales but addresses structural issues fueling the deficit and by working with congressional Democrats to improve the NAFTA so it has a chance to pass,” said Lori Wallach, director of Public Citizen's Global Trade Watch. “The growth of the trade deficit is accelerating in part because of early enactment of government policies like Trump’s tax package that incentivized production and job outsourcing while the major trade reforms are just now coming to a head.”

The annual 2018 trade data show the highest-ever recorded U.S. trade deficit with China. The U.S. deficit with China has grown during both years of the Trump administration, spotlighting why many China trade and foreign policy experts are urging the president not to cave in and accept a quick and meaningless China trade deal that fails to secure fundamental reforms necessary to reduce the deficit.

The data also show additional imports from Mexico during the Trump administration, especially in the auto sector, driving up the trade deficit with North American Free Trade Agreement (NAFTA) partners to its highest level since 2008. The data bolster congressional Democrats’ calls for the revised NAFTA deal that Trump signed to be improved, including by ensuring swift and certain enforcement of strong labor and environmental standards to reduce the incentive to outsource jobs to Mexico.

The U.S. trade deficit with China has set another all-time record. The goods trade deficit with China was the highest ever recorded – a 16 percent increase over 2016 – the last year of the Obama administration. The China goods trade deficit in 2018 was $419 billion, a 9 percent increase over a $384 billion deficit in 2017, which came after a 6 percent increase over $361 billion in 2016, President Barack Obama’s last year in office.

The U.S. goods trade deficit with NAFTA partners is the highest in the decade since the financial crisis – a 20 percent increase over 2016 – with auto leading the growth. The U.S. trade deficit with NAFTA partners during 2018 increased 10 percent to $215 billion from $196 billion in 2017, which was an increase of 9 percent from $180 billion in 2016. The previous record NAFTA trade deficit came in 2007 before the effect of the 2008-09 financial crisis when it reached a record $235 billion before falling to $146 billion in 2009. Three-fifths of the $43 billion growth in Mexican imports to the United States since 2016 is accounted for by the automotive (HS 87) and machinery sectors (HS 84). This comes before GM’s closures of four plants and opening of a new Mexico plant.

The overall U.S. goods trade deficit with the world is set to be the highest since the financial crisis – up 15 percent over 2016. The U.S. trade deficit with the world in 2018 increased 8 percent to $879 billion in 2018 from $814 billion in 2017, which was up 6 percent from $766 billion in 2016. The previous record annual deficit was prior to the 2008-09 financial crisis when it reached $1 trillion in 2006 before falling to $586 billion in 2009.

U.S. Trade Deficit is Worse Than It Looks

U.S. energy exports are masking deepening manufacturing deficits. In 2008, oil and gas made up a greater share of the U.S. trade deficit than all other products combined. Since then, the deficit in oil products has plummeted and now makes up only 5 percent of the deficit with the United States projected to be a net energy exporter next year. Meanwhile, the deficit in manufactured goods has expanded and the surplus in agricultural products has declined. But for the boom in domestic energy production and exports, the overall trade deficit would have been much worse.

The growth of the trade deficit is accelerating under Trump. The trade deficit is not just growing larger, but quickening its pace of growth under Trump. For the world deficit over the 11-month period, after a 6 percent bump between 2016 and 2017, the deficit increased 8 percent from 2017 to 2018. And, as the trade deficit is growing twice as fast as GDP, now almost reaching record pre-financial crisis levels as a share of GDP, it’s not simply the strong U.S. economy that is driving the trade deficit, contrary to what some experts claim. Rather, there are structural trade problems.

Breathless coverage this past year of the impact of Chinese tariffs on U.S. soybeans, the second-largest export to China (after aerospace equipment) betrays the depletion of the U.S. export base. Not only do we now import $4 worth of goods for every $1 we sell to China, but low-value-added commodities like soybeans, cotton, oil, gas, metal scrap, wood pulp and paper waste make up most of the top 15 U.S. export products to China. In fact, the latest data available from 2017 on this measure show that 43 percent of our exports to China are low-value-added products, while only 6 percent of imports from China are in low-value-added categories. If more high-value-added products are produced offshore, our structural trade deficit will persist.

NOTE: We provide comparison data for cumulative deficits for 2018 relative to past years because this offers a clearer picture of trade trends than changes in month-to-month numbers. Monthly trade figures are volatile, and Census’ “seasonal adjustment” of it cannot control for unpredictable factors, such as exporters shifting shipment dates to avoid imposition of various countervailing tariffs. We focus on goods trade balances because services data by country lags the goods data and won’t be available until April 2019. The value of goods trade is also more than triple that of services trade, so has more impact on overall trends.

Grim Trade Balance Data Spotlights Imperative for Trump to Not Cave on China Trade Talks and to Work with House Democrats to Improve NAFTA Deal

The 2018 annual trade data to be released by the U.S. Census Bureau on Wednesday will likely show record-setting U.S. goods trade deficits, capping two years of steadily rising trade deficits for the Trump administration that contrast with candidate Donald Trump’s promises to quickly reduce them. The rate of growth in the trade deficit has increased during the Trump era, with the increase from 2017 to 2018 greater than the change from 2016 to 2017.

“More important than Trump failing on the trade-deficit-reduction benchmark for success he set on trade is that he focus on addressing the root causes by securing a China trade deal that’s not about short-term soy and gas sales but addresses structural issues fueling the deficit and by working with congressional Democrats to improve the NAFTA so it has a chance to pass,” said Lori Wallach, director of Public Citizen's Global Trade Watch. “The growth of the trade deficit is accelerating in part because of early enactment of government policies like Trump’s tax package that incentivized production and job outsourcing while the major trade reforms are just now coming to a head.”

Based on 11-month 2018 data trends, the annual 2018 trade data is likely to show the highest-ever recorded U.S. trade deficit with China. The U.S. deficit with China has grown during both years of the Trump administration, spotlighting why many China trade and foreign policy experts are urging the president not to cave in and accept a quick and meaningless China trade deal that fails to secure fundamental reforms necessary to reduce the deficit.

The data also will likely show additional imports from Mexico during the Trump administration, especially in the auto sector, driving up the trade deficit with North American Free Trade Agreement (NAFTA) partners to its highest level since 2008. The data will bolster congressional Democrats’ calls for the revised NAFTA deal that Trump signed to be improved, including by ensuring swift and certain enforcement of strong labor and environmental standards to reduce the incentive to outsource jobs to Mexico.

When Wednesday’s data is released, Public Citizen will post updated annual data, which also will be available on our Trump trade deficit tracker. Annual trends for 2018 will likely be in line with the following major trends observed through the first 11 months of the year:

What to Look for When Census Releases the Annual 2018 Trade Data on Wednesday

Source: U.S. Census Bureau. All figures adjusted for inflation. NAFTA trade balance does not include re-exports of imported goods.

The U.S. trade deficit with China is on pace to set another all-time record. The goods trade deficit with China was the highest first 11 months ever recorded – a 15 percent increase over 2016 – the last year of the Obama administration. The China goods trade deficit during the first 11 months of 2018 was $382 billion, a 9 percent increase over a $352 billion deficit in 2017, which came after a 6 percent increase over $332 billion in 2016, President Barack Obama’s last year in office.

The U.S. goods trade deficit with NAFTA partners is on pace to be the highest in the decade since the financial crisis – a 20 percent increase over 2016 – with auto leading the growth. The U.S. trade deficit with NAFTA partners during the first 11 months of 2018 increased 10 percent to $198 billion from $179 billion in 2017, which was an increase of 9 percent from $164 billion in 2016. The previous record 11-month NAFTA trade deficit came in 2008 before the effect of the 2008-09 financial crisis when it reached a record $220 billion before falling to $130 billion in 2009. Three-fifths of the $40 billion growth in Mexican imports to the United States since 2016 is accounted for by the automotive (HS 87) and miscellaneous machinery sectors (HS 84). This comes before GM’s closures of four plants and opening of a new Mexico plant.

The overall U.S. goods trade deficit with the world is set to be the highest since the financial crisis – up 14 percent over 2016. The U.S. trade deficit with the world over the first 11 months of 2018 increased 8 percent to $806 billion in 2018 from $749 billion in 2017, which was up 6 percent from $707 billion in 2016. The previous record 11-month deficit was prior to the 2008-09 financial crisis when it reached $949 billion in 2006 before falling to $531 billion in 2009.

The U.S. Trade Deficit is Worse Than It Looks

U.S. energy exports are masking deepening manufacturing deficits. In 2008, oil and gas made up a greater share of the U.S. trade deficit than all other products combined. Since then, the deficit in oil products has plummeted and now makes up only 7 percent of the deficit with the United States projected to be a net energy exporter next year. Meanwhile, the deficit in manufactured goods has expanded and the surplus in agricultural products has declined. But for the boom in domestic energy production and exports, the overall trade deficit would have been much worse.

The growth of the trade deficit is accelerating under Trump. The trade deficit is not just growing larger, but quickening its pace of growth under Trump. For the world deficit over the 11-month period, after a 6 percent bump between 2016 and 2017, the deficit increased 8 percent from 2017 to 2018. And, as the trade deficit is growing twice as fast as GDP, now almost reaching record pre-financial crisis levels as a share of GDP, it’s not simply the strong U.S. economy that is driving the trade deficit, contrary to what some experts claim. Rather, there are structural trade problems.

Breathless coverage this past year of the impact of Chinese tariffs on U.S. soybeans, the second-largest export to China (after aerospace equipment) betrays the depletion of the U.S. export base. Not only do we now import $4 worth of goods for every $1 we sell to China, but low-value-added commodities like soybeans, cotton, oil, gas, metal scrap, wood pulp and paper waste make up most of the top 15 U.S. export products to China. In fact, 43 percent of our exports to China are low-value-added products, while only 6 percent of imports from China are in low-value-added categories. If more high-value-added products are produced offshore, our structural trade deficit will persist.

NOTE: We provide comparison data for cumulative deficits over 11 months for 2018 relative to past years because this offers a clearer picture of trade trends than changes in month-to-month numbers. Monthly trade figures are volatile, and Census’ “seasonal adjustment” of it cannot control for unpredictable factors, such as exporters shifting shipment dates to avoid imposition of various countervailing tariffs. We focus on goods trade balances because services data by country lags the goods data and won’t be available until April 2019. The value of goods trade is also more than triple that of services trade, so has more impact on overall trends. All figures are adjusted for inflation, representing changes in trade balances expressed in constant dollars.

Donald Trump is likely to misrepresent the facts and inflate his record on trade as he hits the midpoint of his presidential term and delivers his second State of the Union address. We offer this handy guide to help sort fiction from fact. While the administration’s trade reform effort includes some key steps in the right direction, it remains a work in progress with uncertain outcomes.

Past Trump Mischaracterization

Reality

UNFAIR TRADE: President Trump says he has “turned the page on decades of unfair trade deals.”

Transformation of U.S. trade policy remains a work in progress, with uncertain outcomes. The signing of the North American Free Trade Agreement (NAFTA) 2.0 text on November 30 was the first step in a long process, and further improvements are necessary for a final package to pass Congress much less for revisions to stop NAFTA’s ongoing damage to workers and the environment. Only very limited revisions were made to the U.S.-Korea Free Trade Agreement. There is still a danger that the ongoing trade battle with China could end in one-time purchases of U.S. exports that would do nothing to address China’s underlying unfair trade practices and deliver the necessary structural changes to alter long-term trends. Contrary to his promises to do something about trade imbalances, the trade deficit is up 13 percent under Trump. By the time Trump announced he would formally shelve the Trans-Pacific Partnership (TPP) agreement, it was a moldering corpse that could never muster a majority in Congress, meaning his role was in the pact’s burial, not in authoring its demise.

TRADE DEFICIT: Trump says that U.S. trade relationships are more “balanced” and “reciprocal,” but he has yet to fulfill his campaign promise to bring down the trade deficit: “We have a massive trade deficit with China, a deficit we have to find a way quickly, and I mean quickly, to balance.”

On the one clear measure that Trump set for himself as a benchmark for success – bringing down the U.S. trade deficit – he is failing – with the largest China deficit ever recorded and a 13 percent increase in the U.S. trade deficit with the world during the Trump administration. As our Trump trade deficit tracker shows, the U.S. trade deficit has grown significantly under Trump. The latest quarterly government data (released in November – the 2018 annual data is a shutdown victim and a new release date has not been announced) reveals the highest U.S. goods trade deficit in a decade for the first three-quarters of 2018, up 13 percent since the start of the Trump administration. During Trump’s presidency, the U.S. trade deficit with China has risen (also 13 percent) to the highest ever recorded, while the deficits with the world and with NAFTA nations specifically have steadily grown.

USMCA V. NAFTA: Despite an effort to rebrand NAFTA with a new name, Trump’s renegotiation has not fixed the problems of original NAFTA.

Trump’s claim to have created a totally different kind of agreement is a deceitful sales pitch, similar to those used for decades by US presidents to hawk previous trade deals. After a year of renegotiations, the NAFTA 2.0 text signed on November 30 revealed improvements for which progressives have long campaigned, the addition of damaging terms that we oppose, and critical unfinished business. Unless the administration works with congressional Democrats on criticalchanges to the signed agreement, the pact is unlikely to be passed. One way in which NAFTA 2.0 is dramatically worse than the original is the addition of a slew of new monopoly rights for pharmaceutical companies that would help them avoid competition from generic products and keep medicine prices high. While the NAFTA 2.0 labor provisions are an improvement over previous U.S. trade agreements, unless strong labor and environmental standards are subject to swift and certain enforcement—which is not the case with the NAFTA 2.0 text—U.S. firms will continue to outsource jobs, pay Mexican workers poverty wages, and dump toxins in Mexico.

JOB OUTSOURCING: Trump says he has slowed outsourcing and issucceeding on “Buy America, Hire American,” but the data do not support this claim.

Outsourcing of American jobs has continued and not only the high-profile GM and Carrier mass job losses while Trump’s corporate tax policies create incentives for more outsourcing and his promised Buy American reforms lag. GM’s factory closures at the end of 2018 spotlights the ongoing loss of American manufacturing jobs. One of the first companies that Trump met with once taking office, GM closed five plants affecting thousands of workers after expanding production in Mexico. Because of the outsourcing incentives in trade agreements like NAFTA as well as the pro-outsourcing tax bill signed by President Trump, firms will continue to outsource jobs. Even tax dollars that could be used to boost U.S. production continue to be offshored. A government-wide assessment on procurement spending President Trump requested never saw the light of day. Various new “Buy American” executive orders include recommendations but not requirements to expand the policy, making Trump’s “Buy American, Hire American” promises mainly rhetoric without policy action. Case in point: the NAFTA 2.0 text maintains the old NAFTA rules that require the waiver of Buy American procurement preferences with respect to Mexico.

CHINA TRADE: Trump may tout his actions to try to address China’s unfair trade practices, but whether he stays on track, adds the missing elements of a China trade plan and delivers remains to be seen.

Six months after the first set of U.S. tariffs on China, bilateral discussions have yielded little concrete progress. Meanwhile, Trump has failed to take action against trade advantages gained through misaligned currency values nor limit investment by Chinese-government-related entities in the United States. Though one of Trump’s campaign promises was to declare China a currency manipulator on Day One, four semi-annual reports by Trump’s Treasury Department have failed to name any country a currency manipulator. Trump has chosen to rely on criteria created by the previous administration that ensure no action is taken.

USMCA PAYS FOR BORDER WALL - NOT: Though Trump may claim the opposite, NAFTA 2.0 will NOT pay for the border wall between the United States and Mexico.

There are no provisions in NAFTA 2.0 that would directly or indirectly fund the border by putting money into the U.S. Treasury from the Mexican government. When trade generates money for a government’s treasury, it is via payment of border taxes, called tariffs. But even if NAFTA 2.0 raised tariffs, which it does not, that money would not go into a Trump-wall-fund. So, the same issue that caused the showdown would remain: Congress must allocate general revenue to the wall. But there is no such tariff revenue to be had. U.S.-Mexico trade has been duty-free under NAFTA for more than a decade. When NAFTA went into effect in 1994, Mexico agreed to duty-free treatment of everything with a 15-year phase-in. The revised deal does not add new tariffs. Moreover, perhaps the strongest evidence that nothing in NAFTA 2.0 forces Mexico to pay for Trump’s border wall is that Mexico, which has made clear it will not pay, signed the deal.

NAFTA 2.0 FATE IN CONGRESS: Trump says that NAFTA 2.0 can pass easily, but that is not what the vote count suggests.

Thanks to the midterm elections, only a revised NAFTA deal that can win significant Democratic support will get through Congress. Democrats in Congress are insisting that NAFTA 2.0’s giveaways to Big Pharma are eliminated. And also that tougher labor and environmental standards are added, because the deal Trump signed won’t stop corporations from outsourcing American jobs. Trump’s deal is not the transformational replacement of corporate-rigged NAFTA that Americans need. But if the administration works with congressional Democrats on needed improvements, there is a path to passing the revised NAFTA with a broad bipartisan vote.

NAFTA WITHDRAWAL: Trump says he could just withdraw from NAFTA if Congress doesn’t act on the renegotiated deal.

While Trump has the authority to withdraw, neither withdrawing from NAFTA nor maintaining NAFTA 1.0 will raise wages in Mexico (where average annual Mexican wages are down 2 percent with Mexican manufacturing wages now 40 percent lower than in China) that will stop the offshoring that transforms middle-class jobs into sweatshop jobs, or reverse NAFTA’s destruction of nearly a million American middle class jobs.

MEXICO V. U.S. IN NAFTA: Trump says the United States was a victim of the original NAFTA.

Trump’s notion of NAFTA as a plot by Mexico to hurt U.S. workers is absurd. NAFTA was the brainchild of U.S. presidents, was negotiated with input from hundreds of U.S. corporate trade advisors, and has been devastating to working people in both Mexico and the United States alike. Since NAFTA was signed, U.S. real wages are flat and real wages have actually declined in Mexico.

Letter to Congress: Giveaways to Big Pharma Must Be Removed From Revised NAFTA

WASHINGTON, D.C. – After overwhelming public demand to reduce medicine prices helped propel Democrats to a majority in the U.S. House of Representatives, today more than 70 U.S. organizations launched an effort to remove new monopoly protections for pharmaceutical firms added to the revised North American Free Trade Agreement.

In a letter to Congress, the groups – representing tens of millions of Americans – demand that the pact’s giveaways to Big Pharma that would keep medicines unaffordable be removed before the pact is sent to Congress

The diverse group of patient advocacy, faith, consumer, labor and other public interest organizations that signed the letter took aim at NAFTA 2.0 terms that would “lock in place existing U.S. policies that have led to high medicine prices, undermining the authority of this and future Congresses to implement important reforms to expand generic and biosimilar competition, lower medicine prices and expand access.”

Among other dangerous requirements is that each NAFTA country guarantee a minimum of 10 years of marketing exclusivity – that is, longer monopoly protections – for cutting-edge biologics, which includes many new cancer treatments and even vaccines. This would lock the United States into its current system that keeps prices for biologics sky-high and export it to Mexico, which does not mandate a special exclusivity period for biologics, and to Canada, which now has an eight-year period.

Some of the signatory organizations have identified ways in which the NAFTA 2.0 text improves on the original NAFTA and are calling for strengthened enforcement of the revised pact’s new labor and environmental terms. But one way in which NAFTA 2.0 is dramatically worse than the original is the addition of a slew of new monopoly rights for pharmaceutical corporations that would help them avoid competition from generic and biosimilar products and keep medicines unaffordable.

The letter notes that a decade ago, congressional Democrats and then-President George W. Bush agreed on a standard for trade-pact intellectual property terms that strove to promote innovation and access to affordable medicines. That standard is not met in the NAFTA 2.0 text.

With one in five people in the United States failing to fill prescriptions due to their cost, the letter signers urge the new Congress to demand “that the administration eliminate the provisions in the NAFTA 2.0 text that undermine affordable access to medicines.” Focus on widespread public anger over health care costs helped propel the Democrats to victory in the midterm elections.

Please see below for quotes from representatives of Consumer Reports, Doctors Without Borders, NETWORK Lobby for Catholic Social Justice, Social Security Works, the AFL-CIO and Public Citizen.

“Prescription drugs are priced out of reach for too many Americans. But, there are provisions in the NAFTA 2.0 proposal that would lock in prolonged monopoly pricing for prescription drugs. These provisions do not belong in any trade agreement that is supposed to benefit American consumers and workers. We urge Congress to insist on taking these provisions out. We should all be working to make prescription drugs more affordable, and this proposal would just further tighten the monopoly grip of drug makers.” – Dena Mendelsohn, senior policy counsel at Consumer Reports

“It’s absolutely reckless and counterproductive for the U.S. government to support this deal despite evidence that it keeps drug prices high and further reduces access to lifesaving medicines. This agreement is not only a threat to patients in the United States, Mexico and Canada, it also sets a dangerous precedent for future trade deals involving countries all over the world, including many in which Médecins Sans Frontières works.” – Leonardo Palumbo, advocacy adviser at the Médecins Sans Frontières (Doctors Without Border) Access Campaign

“Pope Francis says that to be faithful, the economy must serve people first, not wealthy corporations. NAFTA 2.0 does not meet the mandate because it preferences giveaways for powerful drug companies that will harm patients. This new trade deal bars Congress from reducing drug prices, putting American lives at risk. Nearly one in four Americans report they or a family member have not filled a recent prescription because of costs, and prices continue to skyrocket. This needs to change. There is new bipartisan interest in Congress to begin tackling the issue of drug pricing. We cannot allow “big pharma lobbyists” to undermine the needs of our people. The profits of big pharma should not be prioritized over the health of people. Trade deals should not endanger the health of Americans. The Trump administration must eliminate these immoral provisions of NAFTA 2.0.” – Sister Simone Campbell, executive director of the NETWORK Lobby for Catholic Social Justice

“It is unacceptable that provisions in the NAFTA 2.0 (USMCA) prioritize profits and protect special interests over high-quality health care and affordable medicines. America’s working families deserve better. We will continue to fight for fair trade rules that protect their wages, their rights on the job and their access to affordable medicines.” – Cathy Feingold, director of the International Department at the AFL-CIO

“NAFTA 2.0 contains massive handouts to big pharma that will raise our drug prices. We need to smash pharmaceutical monopolies in the United States, not allow these corporations to use trade deals to make it impossible for us to lower our prices. Many members of Congress in both parties claim they want to take on big pharma and bring down prescription drug prices. But they will all be liars if they don’t also demand changes to NAFTA 2.0 to eliminate the handouts to drug corporations.” – Alex Lawson, executive director of Social Security Works

“With consumer anger mounting, Big Pharma aims to use NAFTA 2.0 to lock in the government-granted monopolies that give drug corporations their power to price gouge consumers in the United States and around the world. The idea was to sneak a provision into the trade deal that would prevent the United States, Canada or Mexico from reducing monopoly terms in their domestic law for cancer and other important medicines. But here’s the bad news for Big Pharma: Congress is aware of the pharmaceutical corporations’ sneaky effort to lock in high drug prices using NAFTA 2.0, and if those terms are not eliminated, it’s hard to imagine how a deal gets through Congress. – Robert Weissman, president of Public Citizen

Note: In his Oval Office address, Donald Trump again falsely claimed that somehow his revised North American Free Trade Agreement (NAFTA 2.0) will fund his border wall.

Donald Trump keeps repeating the ludicrous claim that somehow the revised NAFTA will fund his wall even though it remains unclear if the deal will be enacted and if it is, the text does not include border wall funding directly nor would it generate new government revenue indirectly given it cuts the very few remaining tariffs, not raises them.

A back of the envelope calculation reveals a new 20 percent tariff would have to be imposed on all imports from Mexico to put the money to construct the wall into the U.S. Treasury and that money would come from importers, not the Mexican government. All imports into the United States from Mexico have been duty free for more than a decade, meaning that NAFTA trade does not generate money from Mexican importers for U.S. government coffers and nothing in the NAFTA 2.0 changes that.

So much for Trump’s great negotiating skills, given its obvious that trying to connect NAFTA to funding for his wall decreases the likelihood Congress passes the revised NAFTA, even if Trump’s NAFTA-wall-funding claims are entirely without merit.

Perhaps the strongest evidence that nothing in NAFTA 2.0 forces Mexico to pay for Trump’s border wall is that Mexico, which has made clear it will not pay, signed the deal.

As the North American Free Trade Agreement (NAFTA) marks a quarter century in effect (Jan. 1, 2019) and the congressional battle over a renegotiated deal heats up, Public Citizen today released a user-friendly analysis that documents the chasm between the reality of NAFTA’s negative outcomes and the rosy promises made by its proponents. Those promises included major U.S. jobs gains, higher wages in Mexico and thus less U.S. migration, an improved U.S. trade balance with Canada and Mexico, and environmental improvements.

“NAFTA proved so damaging that its fallout ended decades of U.S. bipartisan congressional consensus in favor of trade agreements,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. “The NAFTA 2.0 text signed on Nov. 30 would not stop NAFTA’s ongoing job outsourcing, downward pressure on our wages and attacks on environmental safeguards, but there is a clear path to improving it so a final NAFTA package could win wide support next year.

“The status quo of NAFTA helping corporations outsource more U.S. jobs to Mexico every week after nearly one million have been government-certified as lost to NAFTA is not acceptable, nor are the ongoing Investor-State Dispute Settlement (ISDS) attacks against environmental and health safeguards or corporations’ exploitation of Mexican workers, who today face $1.50 per hour manufacturing wages that are lower in real terms than before NAFTA,” said Wallach. “Neither withdrawing from NAFTA nor maintaining NAFTA 1.0 will raise wages in Mexico, which is necessary to stop NAFTA offshoring that transforms middle-class jobs into sweatshop jobs.”

Key highlights of the data-packed analysis, which provides data tables, graphics and links to original sources, include:

Almost one million American jobs have been government-certified as lost to NAFTA, contrary to promises that one million American jobs would be gained in NAFTA’s first five years.

Real wages in Mexico have decreased since NAFTA, which generated growing incentives to outsource U.S. jobs. Mexican gross domestic product per capita has barely risen. Labor conditions in Mexico did not improve, nor have Mexican standards of living come closer to those in the U.S. as promised.

Instead of increasing U.S. wages as promised, NAFTA’s elimination of high-wage manufacturing jobs has put downward pressure on the wages of the two-thirds (66 percent) of American workers without college degrees. And wages in growing non-offshorable service sectors also have been held down as displaced manufacturing workers sought new employment.

Contrary to promises that NAFTA would not threaten consumer and environmental safeguards, U.S. truck safety and meat labeling policies were rolled back, hundreds of millions have been paid to corporations that have successfully attacked environmental and health laws, and imports of meat that do not meet U.S. safety rules soared while border inspection declined.

A large NAFTA trade deficit composed mainly of manufactured goods emerged, contrary to proponents’ promises that the U.S. trade balance with Canada and Mexico would improve.

Instead of environmental conditions improving in Mexico, they have deteriorated. And not one of the 91 enforcement actions brought under NAFTA’s environmental rules led to action.

The U.S. agricultural trade surplus before NAFTA became a deficit, as U.S. agricultural exports have lagged and agricultural imports have surged, with small farms hardest hit – contrary to promises that NAFTA would be a boon to U.S. farmers.

Mexico turned into an export platform for China and other Asian companies seeking duty-free access into the U.S. market, and the share of Chinese imports into Mexico grew, displacing U.S. market share, despite promises to the contrary.

NAFTA destroyed Mexican livelihoods and displaced millions of people in rural Mexico, creating a powerful push factor for migration, contrary to claims that NAFTA would reduce unauthorized immigration from Mexico.

About Us

Eyes on Trade is a blog by the staff of Public Citizen's Global Trade Watch (GTW) division. GTW aims to promote democracy by challenging corporate globalization, arguing that the current globalization model is neither a random inevitability nor "free trade." Eyes on Trade is a space for interested parties to share information about globalization and trade issues, and in particular for us to share our watchdogging insights with you! GTW director Lori Wallach's initial post explains it all.

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